The trading snafu heard round the world - cheekily dubbed the "Knightmare on Wall Street" - has cast new doubts on the automated systems that dominate global exchange trading.
Knight Capital Group's trading glitch manifested itself a day after Swiss banking giant UBS booked a $356 million loss on Facebook's mishandled IPO - in large part because of a botched electronic order. UBS's charge was slightly less than Knight's (KCG) whopping $440 million blunder.
In the wake of the debacles, two themes are encroaching on market narratives: Investor confidence in trading has been further weakened, and the "man vs. machine" debate has been officially revived.
Slowly but surely, a consensus is emerging that automated trading may require a few more real hands on the till - if not handing the reins back to humans altogether. That is a sharp reversal in sentiment years after electronic trading gradually supplanted Wall Street's floor traders.
"You get in the plane with an auto pilot, [but] you wouldn't get in a plane with no pilot," Art Cashin of UBS Financial Services told CNBC. "You need somebody to supervise these things."
Knight's shares jumped more than 50 percent on Friday amid reports of the company finding either a white knight or a capital infusion, still below the previous day's blood-curdling 65 percent plunge.
But it wasn't sufficient to temper the endless criticism of Knight and automated trading, with market analysts using terms like "out of control" and "asleep at the switch" to describe the high-frequency trading.
In the prior decade, Wall Street got swept-up in a frenzy of electronic trading and deregulation that made terms like "dark pools" and "black boxes" commonplace, while systematically making floor traders obsolete. Now, the pendulum could be swinging back the other way.
"I do think there's more regulation that needs to come into play here," Stuart Meissner of Stuart D. Meissner LLC told CNBC. Citing the "flash crash" of 2010, as well as Facebook and Knight's problems, Meissner said that electronic trading operators require "backup systems" that can step in when markets fail.
Late Friday, however, Knight's prospects appeared to brighten when TD Ameritrade(AMTD) and Scottrade - two of the nation's largest online brokers - reversed their decision to drop their routing of orders through the market-maker. At least momentarily, the developments helped dispel some of the gloom surrounding the firm.
Knight co-founder Kenneth Pasternak voiced strong support for the company and its future in a CNBC interview. Pasternak, who is still heavily invested in the company, commended Knight CEO Thomas Joyce for what he called "exemplary" crisis management skills.
Still, with memories of the flash crash and other automated trading problems lingering fresh in the mind of investors, it could only be a matter of time before Knight and other automated traders find themselves under scrutiny once more. Even NYSE Euronext's CEO, Duncan Niederauer, said Knight's woes should be seen as a "call to action" to reform market structure.
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